Across industries, managers and leaders often struggle to determine whether handling capabilities in-house or outsourcing them is financially and operationally advantageous for their companies. Put more simply, this struggle can be expressed as: “We need X. Should I make it or buy it?”

While the make vs. buy conundrum is central to many types of businesses, competition ratchets up the pressure. The more competitive a market is, the greater the pressure is on a company to find and maintain an edge. As the medical device industry is fiercely competitive, quality, safety, and velocity are all critical to profitability and growth. For these reasons, it’s more important than ever to make the right decision when it comes to in-house production or outsourcing. But, where does a firm start?

Labor Costs
Making the best decision isn’t necessarily straightforward. For instance, while space or capacity may exist, it does not mean a company shouldn’t outsource. To determine which option offers advantages, internal costs and geographic cost pressures need to first be clearly understood.

In any business, labor costs can be variable, subject to both internal and external pressures. Geography and cost of living, supply and demand, the state of the hiring market, and the skills required can all affect labor rates. Locations in or near areas with a higher cost of living can drive up labor costs.

Also, over time, some of these pressures may shift. As the hiring market becomes more competitive, for instance, a shortage of skilled candidates may drive up labor costs. Paying more for labor will, of course, increase costs and reduce profitability.

Calculating True Internal Costs: The Full-Burden Labor Rate
Everything undertaken as a business incurs both direct and indirect costs. With an accurate calculation of the full-burden labor rate—which represents the true internal cost—one can understand how and when labor costs are in a company’s favor and when they reduce profitability. That clarity can help determine whether the best allocation of resources is to keep capabilities in-house or outsource them.

Calculating the full-burden labor rate starts by adding together the cost of all employees associated with production, including wages and costs of temporary and permanent staff; associated costs incurred by IT personnel, operations, and quality assurance staff; associated maintenance staff costs; and costs for proportional time accrued by management/other leadership.

Once those costs are added together, the hours associated with delivering each capability can be determined. Knowing hours and internal cost can enable direct comparisons between in-house and outsourcing to be made—and help to avoid the three myths of capabilities decisions.

Since many companies do not have an accurate calculation of their full-burden labor rate, they can fall into common traps when it comes to decisions on functions such as cleaning, validated packaging, field returns, or loaner kit management.

Myth #1: If It’s Done In-House, It’s Free
Nothing is ever free. A company incurs direct and indirect costs every day, so be wary of falling into the trap of only costing out the labor directly associated with a particular function, as that does not represent the entire cost.

Consider the example of handling cleaning and packaging in-house. Although it may seem that only personnel associated with the cleanroom are incurring cost, that isn’t the case. Cleanrooms require dedicated space, incur utility costs, involve quality and maintenance staff, and even take time and attention from management. It’s easy to see how this can seem “free,” but it actually comes at a high cost when the full-burden labor rate is determined. Once the cost of the cleanroom at an hourly or daily basis can be calculated, the best business decision—in-house or outsourcing—can be made.

Myth #2: If I Have Space or Capacity, I Should Do It In-House
Consider the in-house decision from another angle. Let’s say the space for a cleanroom exists, but additional labor will be required for the in-house option to be feasible. Temporary staff is brought in to augment capacity. Does the decision, however, take into account the total combined overhead, indirect, and fixed costs? Can capacity flex with demand? At the end of the day, does it make financial sense to do so?

Even if a company is large, resources—like time, staff, and budget—are finite. Growth comes through product development and a bigger client base along with ever-increasing operational efficiency. When done well, the results include higher profits and access to more working capital.

If everything is accomplished in-house, employees cannot possibly focus on—and prioritize—core competencies like product design and marketing—the fundamental drivers of growth. It’s about opportunity cost: spending time and resources on areas where the company’s employees are inefficient or lack true expertise ends up detracting from established competencies and affecting the bottom line.

Myth #3: All Outsourcing Decisions Are the Same
Once outsourcing has been determined to be operationally and financially advantageous, it’s important to resist falling for the final myth—any vendor will do. Not all outsourcing decisions are equal.

Broadly speaking, there are two choices when it comes to outsourcing. The first is to choose an expert partner that knows and understands the industry and has a proven track record of success. The second is to try to find efficiency with a current vendor; for example, allowing a vendor that produces product to bid on packaging it, too. While it’s tempting in this example to consider the idea that a product will be complete when it arrives at the finished goods warehouse and costs reduced, the firm may be risking more than it saves.

The most important priority is getting to market safely, so patients’ lives can be improved, the R&D investment can be recouped, and the business expanded. If a product can’t be brought to market safely, the company can’t realize the main priority. An expert partner that has a sole focus on outsourced capabilities offers an advantage—an independent source ensuring cleaning, packaging, or other outsourced tasks are consistently accomplished correctly. To illustrate, if one was writing an academic article, would the author want the publisher to also be the fact checker? An independent source can provide assurance and verification that increases confidence and reliability in the product, its safety, and its quality.

Six Advantages of Full-Service Outsourcing
Not all expert outsourcing partners are able to address all needs; not all outsourcing partners are full-service firms. When selecting a full-service outsourcing partner that can provide all post-manufacturing and aftermarket services, scale, efficiency, expertise, and access to quality processes are unlocked, which can result in fantastic growth.

The right partner brings established and efficient systems, outside talent, and perspective that can, in the long term, drive down fixed costs while augmenting or shifting capabilities currently handled in-house.

1. Optimal allocation of resources—Outsourcing can help a company flex with peak and unanticipated demand without increasing fixed costs or adding to headcount. Scale up and down as need and demand dictate.

2. Lower cash investment—Outsourcing can help a firm make better use of its resources. For instance, turning over loaner kits faster can help drive down the inventory footprint, enabling more surgeries to be supported with fewer kits overall. Optimizing inventory can help free up more working capital to reinvest in product development and innovation.

3. More nimble response to demand—With outsourcing, a company can extend its daily shipping window, for example, without incurring overtime. Handling a larger number of cases—again with optimization of inventory—can help drive the business’ volume and velocity.

4. Expertise that accelerates success—Consider how an expert outsourcing partner can help a firm achieve success more quickly without sacrificing quality or safety. For instance, use outsourcing package design and validation as an example. Choosing the right partner can help a company avoid pitfalls that may extend the validation timeframe and, ultimately, slow the product launch. In this case, as with other outsourced capabilities, true expertise covers not only how to design a package that effects an aseptic transfer into a surgical suite and a patient, but also how to handle distribution testing and accelerated aging testing to demonstrate safety and compliance without failures or setbacks.

5. Confidence in quality and safety—A full-service outsourcing partner will have a demonstrated track record of success across multiple capabilities. Those firms that adhere to the highest standards for quality and safety will truly embrace a commitment to the patient. By providing industry perspective from experience with other device manufacturers, such a partner will be able to provide guidance on the latest and best practices.

6. Freedom to focus—Arguably, the greatest benefit of full-service outsourcing is the freedom the right partnership provides. Remember, any company’s staff, time, and budget are finite. Outsourcing allows companies to focus on their core competencies of research, product development, and marketing; pursuing these successfully is what ultimately ignites growth for the business.
At first, the make vs. buy decision can seem simple if one falls for the common myths. Yet, simply having the space or capacity does not mean a company should handle all capabilities in-house. Correctly calculating and factoring in the full-burden labor rate will help one understand when outsourcing key capabilities is the most effective allocation of resources.

Conclusion
The right partnership with a full-service outsourcing provider offers an array of advantages for medical device companies. Those advantages include established processes, efficient systems, and labor that can flex with peak or unanticipated demand. Other benefits include the guidance to optimize inventory, a reduction of cash investment, and time to market optimization—all while preserving quality and safety.
Clarity with regard to costs can help executives make the smartest decision when it comes to the make vs. buy question. That accuracy can help them decide if they keep processes in-house, or if they should shift to a full-service partner to increase velocity and ignite growth.

Tom Williams joined Millstone in 2008 and has managed its packaging facility in Fall River, Mass., and loaner kit and distribution facility in Memphis, Tenn. Williams works closely with customers to develop new service offerings and facilitate speed and efficiency to market. He received a bachelor of science degree from UWIC and an MBA from Babson College.

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